FX forecast July 2023 - US dollar remains expensive

Q3 USDCAD
Median  1.32
Mean  1.33
High  1.40
Low  1.29
Forward 1.33

Economic backdrop and US dollar
The regional banking crisis in the US was the main theme in May which was followed by the US debt ceiling crisis in June. The US Congress had to elevate the debt ceiling to prevent possible default on its debt obligations. The issue seems to have been resolved for now but could add more strength to the US dollar.

The latest job reports in the US showed higher-than-expected jobs created in the US. Unless households lose their jobs and unemployment increases, the higher policy rates may not be effective and inflation may remain high.

With that, the US Federal Reserve noted that two more rate hikes are possible in 2023 and the committee members’ expectations show two hikes of 0.25%, pushing interest rates to 5.75%. The US dollar will benefit from the move though still the quantitative tightening of the Fed looks too aggressive and may be moderated at some point in 2023.

If Fed’s hawkish stance leads to economic recession in the US and globally, the US dollar will be the haven with more commodity-oriented FX such as CAD depreciating. Otherwise, if inflation, which continues to prove stickier than expected, comes in close to the 2% target, US central bank may adopt a less hawkish tone and the US dollar could weaken. The latter scenario is less probable especially as the outlook for European countries is not clear although the US dollar is exceptionally strong and at some point should weaken and mean revert.

Canadian dollar
Bank of Canada increased interest rates by another 0.25% to 4.75% as the economy and housing market in specific showed signs of heating up again. The forecasts expect another 0.25% in the coming meeting. Unlike the US, the Canadian economy is less rosy and showing signs of slowing down. The end of the US rate hike should give way to a weaker US dollar but Canada is following the same path and also not receiving too much support from oil prices.

As the Median forecast shows the Canadian dollar should remain around 1.33 and in case the US dollar weakens, levels of around 1.28 is not out of reach. As getting closer to fall and winter, energy prices may increase giving more support to the Canadian dollar.